A Hong Kong Proxy War In The Making?

The risk of a proxy war in Hong Kong, between the Chinese Communist Party and the West has greatly increased in late 2019. The global economy is slowing. A weak U.S./Europe alliance is being challenged by a Beijing emboldened by its hard-line success in Xinjiang. Battle lines are once again being drawn between liberal and authoritarian forces.

As China has been modernizing trade routes into Europe it has disrupted ethnic groups in its north-west, Xinjiang region, like the Uyghurs and ethnic Turks. In 2009 people from these groups were responsible for riots and terrorist attacks. China, believing the attacks would only escalate, sent in the army and police after 2010. Since then, China has been building re-education camps, and installing cameras and policemen on every block.

Additionally, China is developing advanced spying technologies to monitor every person’s electronic devices. China’s goal is to “educate” all young people to respect and follow the Chinese government. Estimates of how many people are in the education camps varies from hundreds of thousands to 1.5 million. Naturally, the Chinese government admits there are some camps but does not discuss the extent, or ultimate end-game. The best guess is that once China has worked out the bugs in its surveillance and policing system it will release the Uyghurs back into their communities where they can be closely monitored.

The U.S. and the Western governments, having no security interests in the region, have remained silent. The Chinese look upon their solution as benevolent.

The Xinjiang problem is similar to the U.S. South American immigration issue in that both people are not allowed to immigrate to the big cities of either China or the U.S. Europe tackles immigrants through refugee camps and the U.S. through border control. In all cases, there are millions of people that neither China nor the West wants to deal with.

At the other end of the economic spectrum, both China and the West have been on a decades-long, middle-class and up, building boom. In the past few years, however, there is evidence that construction growth is not sustainable. Chinese construction companies have built entire cities that are now labeled “ghost cities”.

The difference in costs between Chinese goods and the rest of the world has narrowed. As it has, the number of jobs available to rural Chinese has decreased in number and the wages necessary to afford places in the desirable Chinese cities, stagnated. Put another way, if it’s a choice between a city 100 miles away from Beijing (a “ghost city”) and the rural communities they were born in, they choose to go back.

In a less controlled political economy, like the West, there would be news of huge construction company bankruptcies. That isn’t the case in China. The ghost cities are covered up, both financially and in the press. It is very difficult to assess the amount of bad debt created by China’s large housing and infrastructure projects.

If China cannot grow its urban populations and economy to meet its construction supply, then how long, if ever, would it take before the country found itself bankrupt (there is no in-between)? Similarly, in the West, if the wages and number of people don’t fill up new construction in the cities how long before individual companies find themselves unable to service their debt, no matter how small their interest payments?

China uses state controlled money to drive growth. China sets its own GDP. The West uses financial markets to create growth where it sees fit, so GDP is a function of many inputs. China is centralized and the West is decentralized. But both China and the West face the same problem. Ultimately, there is a point at which credit can no longer bridge the gap between demand and supply in real estate development.

Real income then becomes a factor in spending. If it can’t service the debt, credit dries up, and growth stops. Like a stalling plane, when growth stops the market crashes.

A big question is if China’s centrally managed economy and unconstrained credit creation is also fueling the West’s real estate construction? There’s an argument that the Federal Reserve has a U.S. centric view which places little weight on exogenous forces like Chinese credit-fueled capital entering the U.S. economy. That is, it might not be a tightening U.S. economy that creates a crisis in credit markets (what the Fed expects), but a Chinese decision to criminalize external investments to shore up the domestic economy. That might cut the credit needed to keep the housing boom going in the West.

This brings us to Hong Kong. The city is a financial hub sitting between the West and mainland China. Unlike Xinjiang in the north-west, Chinese Hong Kongers have become some of the wealthiest people in the world. The city is clean and pleasant to live in, if one can afford it. However, despite China controlling mainland news, it’s only a matter of time before the rank and file Chinese become resentful of Hong Kong’s independence and special status. Further, Hong Kong has a political, and financial, dual allegiance, to China and the West.

As I’ve written elsewhere, at some point the CCP will have to decide how much wealth is owned by the Chinese people and how much by Chinese individuals.

As Beijing has moved towards integrating Hong Kong into its central government structure, Hong Kong citizens have protested. They no more want Beijing managing their economic and cultural policy than the Uyghurs.

This brings us back to the Chinese police state in the north-west. What do Hong Kong independence groups make of China’s tactics in Xinjiang?

If China does to Hong Kong what it did to Xinjiang, many Hong Kongers will find themselves shipped to education camps on the north-west as soon as they make any complaint. Once the Chinese army moves, one can be sure every Hong Kong resident will be biometrically scanned and surveilled.

Hong Kong independence groups are faced with a chilling choice. Either accept China’s full annexation of Hong Kong or start a civil war. For China there seems to be no middle ground. It’s one of the reasons the protestors have been more violent than one would expect based on the political issues of extradition.

Hong Kong is not a city full of weapons. They would have to smuggle them in from the West. Or sympathetic Asian countries nearby. If there is fighting in a city with modern residential and office towers, the global economy will change forever.

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